Stress tests aren’t always applied if you fix for five years or more

Borrowers and lenders are shunning shorter fixed-rate mortgages because lengthier deals are not always subject to the new “affordability” tests.

Since last month, lenders have been required to stress test whether borrowers could cope with interest rate rises over the next five years. Many have assumed that mortgage rates will reach 7pc by 2019.

Borrowers who apply for a two or three-year fix – which offer the lowest rates – must have a considerable cushion in their disposable income to prove they could afford their repayments at the higher rate. But it has emerged that these tests are not required for loans fixed for five years or more.

This, in part, helps explain the surging popularity of five-year fixed-rate deals and the sudden rush of 10-year mortgages marketed by lenders.

This increased interest in protection against rate rises comes despite indications last week from the Bank of England, headed by Mark Carney, that Bank Rate would probably remain low – and that other measures would be taken, if required, to cool an overheating housing market.

Andrew Montlake of mortgage broker Coreco said the fact that tests were not required for loans fixed for five years or more could make it easier to secure a five-year fix than a two or three-year deal.

“Some lenders apply the stress test to all borrowers but others don’t,” he said. “They are certainly not required to under the new rules, meaning some lenders’ checks will be less onerous for five-year deals.”

Other borrowers are keen to avoid another round of affordability tests in two years’ time so are opting for five-year deals, according to Ray Boulger of John Charcol, another broker.

Five-year fixes currently cost around 1 percentage point more than two-year deals. Although the cost of these deals has been rising over recent months, borrowers can still find rates under 3pc.

The best rate for home purchases is currently 2.94pc. It is available through HSBC with a 40pc deposit and Chelsea Building Society for 35pc deposits. HSBC charges a £1,499 fee and Chelsea charges £1,675.

This week Coventry Building Society launched a five-year fix priced at 2.99pc with a £999 fee.

Aaron Strutt, of broker Trinity Financial, said most of the lowest five-year rates are available through building societies, but the best buy fixes tend to have higher arrangement fees.

“Weigh up the impact of both,” he said. “A low rate and higher fee can make sense if you are taking a larger loan, and vice versa.”

Some lenders are going even further and launching 10-year deals. These have never been popular in Britain because the charges are high and they offer little flexibility. The lowest 10-year fixed rate is Woolwich’s 3.89pc deal, which has a £1,499 fee and is available to those with a 30pc deposit.

However more innovative products are starting to emerge. This week Newcastle Building Society launched a 10-year fix which only has early repayment charges for the first five years. This means borrowers can avoid interest rate rises for a decade, but if their circumstances change or they want to move home after five years they will not be penalised.

Mr Montlake said: “A product that only ties borrowers in for five years is a welcome development because most people don’t want to be locked in for ten years. It will appeal to people who want long-term stability because they have school-age children for example. But it will be of limited appeal to first-time buyers who only tend to stay in their home for a few years before moving on.”

The best five and ten-year fixes

TSB has the cheapest five-year fixed rate at 2.89pc, but this is for remortgage customers only with a minimum loan of £200,000. It is available up to 60pc loan-to-value for a £1,995 fee.

HSBC is offering 2.94pc with a £1,499 fee up to 60pc loan to value, while Chelsea Building Society has the same rate with a slightly lower fee - £1,675 – up to 65pc loan-to-value.

Norwich and Peterborough has a 2.98pc five-year fix, up to 75pc loan-to-value, with a £1,295 fee.

The lowest 10-year fixed rate is Woolwich (Barclays)’s 3.89pc deal, which has a £1,499 fee and is available up to 70pc loan-to-value.

Norwich and Peterborough’s 4.19pc fix comes with no fees and is available up to 75pc loan-to-value.

Both come with early repayment charges that apply for the life of the loan.

Source: London and Country

The new mortgage affordability rules

Lenders are now responsible for assessing whether buyers can afford a loan. They are using intrusive affordability questionnaires to delve into exactly what applicants spend their money on.

Some are drilling down to the finest details of people’s outgoings, asking how much they spend on personal grooming, haircuts, cleaning products, parking and eye care. Many are asking whether borrowers are planning any major life changes that could impact on their income such as starting a family or becoming self-employed.

Lenders are also applying more rigorous stress tests to ensure borrowers will be able to afford their loan in five years’ time, when mortgage rates are likely to be higher. Many are being cautious and assuming rates will reach between 6pc and 7pc by 2019.

And it’s not just new borrowers facing the tough new tests. Existing customers who want to remortgage or move their loan to a new property could find they no longer meet their lenders’ requirements.

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